From deteriorating infrastructure in the United States to the explosion of urban housing and office demand in China, the construction industry is poised for significant worldwide growth.
In fact, according to the consulting firm Accenture, by 2020, construction activities in emerging markets will account for 55% of global output and touch USD $6.7 trillion.
This is incredibly promising, not just for the architecture, engineering, and construction (AEC) space, which will — quite literally — ‘build’ the output, but aftermarket players too, such as the local property management company, asbestos abatement contractors, and others.
However, though a promising outlook, the AEC industry will have its challenges in making the most out of the upturn in infrastructure demand. We examine 5 of these problems below:
1. Poor Productivity
This occurs from a wide range of issues, including:
- idle time due to late or insufficient supply shipments;
- construction vehicles breaking down;
- frequent inclement weather;
- design complications arising midway during construction;
- friction between the different stakeholders (e.g., owner and contractor);
- and others.
Though poor productivity cuts across many areas, the net result is invariably the same: dwindling profitability and rising costs. Thus, despite the demand potential for new construction projects worldwide, AEC businesses will face the same old problems.
The impact of these issues will affect AEC companies in a variety of ways.
For example, established players might falter against newer competitors, especially the AEC giants of China, the top four of which earned a combined $238.5 billion in 2010.
On the other hand, smaller or newer entrants may find it more difficult to gain traction in the market. With fewer resources on-hand, these small AEC businesses will have trouble matching the pricing and pace of their larger competitors.
2. Rising Cost of Materials
Be it tariffs, trade conflicts, inflation or increasing global demand, the cost of construction materials is rising. Between 2017 and 2018, material costs rose 5.3% (ABC).
According to the chart below (courtesy of Associated Builders and Contractors, Inc.), with the exception of softwood lumber and crude petroleum, the cost of all other main construction materials resources rose between 2017 and 2018.
Moreover, the greatest year-over-year (YoY) increases were in steel mill products (such as beams, pipes, plates, etc) and iron and steel at 19.8% and 17.6%, respectively.
(Courtesy of ABC)
The macro (combing all materials) long-term trend for costs are climbing upward, but the micro (individual materials) short-term trends are unpredictable.
Returning to ABC’s chart above, you will see month-over-month price decreases multiple areas. This unpredictability is causing problems for developers in terms of their ability to budget correctly and offer accurate pricing in their bids.
3. Poor Project Performance
The factors above have two major impacts on the performance of construction projects: the risk of going over budget and the risk of failing to deliver within specified timelines.
Going Over Budget
The combination of rising and volatile costs and productivity issues is forcing large or capital infrastructure projects to exceed budgets.
According to a KPMG survey, 31% of contractors managed to remain within 10% of their budget. Furthermore, only 32% of project owners maintained a “high level of trust in their contractors”, while 69% of owners pinned “poor contractor performance” as the “biggest reason for project underperformance.”
Failing to Deliver on Time
The same KPMG survey found that only 25% of construction projects came within 10% of their specified deadlines.
The cause of this is manifold. It can result from certain productivity problems, such as frequent inclement weather, or systemic issues, such as trade wars.
For example, the tariffs on Chinese steel are not just driving up costs, but also putting projects at risk of delays and supply shortages.
These issues slow down projects, but they also force labor and machinery to become idle, which harms productivity and results in additional costs for the contractor.
4. Skilled Labor Shortages
The surge in new construction demand is generating demand for employment. In the US, for example, the construction industry employs 7.2 million professionals, which constitute “the highest levels since the Great Recession of 2008” (Deloitte).
However, it is unclear if there is a sufficient amount of labor to support growth. According to the Deloitte study cited above, since 2014, “the number of jobs openings have almost doubled, the number of hires over the same period has just increased by 14 percent.”
The drawback of lacking skilled labor is that it not only affects your output and ability to meet deadlines, but it puts you at risk of falling behind your competitors.
The labor gap cuts across multiple areas, including mechanical, electrical, and plumbing engineers, civil engineers, architects, skilled trades, HVAC technicians, and plumbing. A company with a weak talent roster is going to struggle against stronger competitors.
5. Sustainability & Efficiency
The United Nations (UN) stated that the building industry possessed the “most potential for delivering significant and cost-effective GHG (greenhouse gas) emission reductions.” The UN added that the sector can cut a potential 84 gigatonnes of CO2 by 2050.
This will be essential as energy efficiency gains will help lower long-term operating costs and emissions. Likewise, a switch to some sustainable building materials may help offset the demand for certain steel products and other resource-intensive supplies.
A key aspect of that switch is embracing key industry standards, such as the Leadership in Energy and Environmental Design (LEED). However, aligning with industry standards (such as LEED) is not a trivial feat.
LEED Adoption in the US & Beyond
(Source: Construction Citizen)
For many AEC companies, it will require overcoming a learning curve in many areas, including building design, materials sourcing, and construction methods. For example, building an energy efficient HVAC could require installing underfloor air distribution systems.
There will be added costs to each of these areas, and that may strain smaller AEC players and put them at a disadvantage against their larger competitors.
To be fair to the construction industry, many of these problems are not in their direct control.
The decision to remove tariffs belongs to governments, while material costs are driven by a range of economic factors.
However, AEC businesses can rein in on certain areas, such as building in contingencies for material supply issues or better managing their machines and workers to prevent idling. Key components of these solutions involve building information modeling and the use of simulation for optimizing resource usage.